270° View

Editor’s Note: The following is part one in a series of blogs excerpted from a report published by Celent entitled Defining A Digital Financial Institution by Daniel Latimore and Zilvinas Bareisis . D3 Banking has licensed the content used for general distribution. For the full report contact Celent.

The promise of lower fixed costs and better efficiency ratios that heralded the introduction of online banking was based on the belief that the Internet could be used to create a self-service environment that would reduce the staffing and technology requirements. In fact, adoption of online banking took longer than expected, and consumers did not abandon the other channels they used to access the services and products offered by their financial institutions.

No one disputes that branch traffic is down and digital use is up at financial institutions. However, there is much debate over the conclusion that such a trend means that branchless banking is just around the corner. To some, the argument for keeping branches open seems to be backward facing, to a time long gone when most consumers had to make a personal visit to their financial institution to make deposits, open accounts and send money. Why hang onto branches when all those services and more can be completed on digital devices? To others, the inability of banks and credit unions to personalize the end user’s digital experience makes them hesitant to close the branches where they still do the bulk of their selling.

The influence of digital access points on the decision by consumers to switch financial institutions continues to grow in importance. It makes a “business as usual” approach the most significant risk an institution can take in responding to the digital needs of customers. According to the Accenture 2014 North American Consumer Digital Banking survey, more than one in four customers would likely consider a branchless digital bank. In addition, nearly three-quarters of US customers—two-thirds in Canada—consider their banking relationship “merely transactional.”

In the last 270° View installment, we discussed how remarkably things have changed since the Stanford Federal Credit Union became the first financial institution to offer online banking. As noted in that blog posting, these changes have not necessarily been for the better in all cases.

More than a couple of really smart folks in the industry have suggested that for financial institutions to be able to respond to the digital revolution raging around them, they first must address the deficiencies in their core banking systems.

I recently had a bathroom remodeled. The contractor I used was a known to me. I have used him for most of the projects at the house over the last few years. Lately, however, his quality of work has diminished as his prices have increased. Because I travel too much to audition new talent, I hoped he would make a comeback on this project.

Online forums and periodicals are filled with debates over the future of the branch. On one side are advocates for remodeling strategies that lower costs by providing the minimum needed to support those members who continue to frequent the branch. The other side argues that turning the branch into something more akin to shopping at an Apple store will drive more revenues through personalized member experiences.

According to Klaus Enzenhaufer of Compuware, there are five major pitfalls that financial institutions encounter as they extend their digital channels: quality, speed, user experience, control and running in place.

Earlier this month, The Financial Brand announced that it was changing the name of its recently acquired Online Banking Report to the Digital Banking Report. According to Jim Marous, the reason for the name change was to expand the coverage of the report to include “the vast digital banking ecosystem.” Jim and The Financial Brand are some of the first – along with Gartner and a few others – to reinforce the strategic nature of the digital banking channel by departing from the fragmented terminology that too many organizations, firms and individuals in the industry still use.